Super-Models and Super-Investors

“Most of us pay more attention to Brazilian supermodels than to Brazilian government bonds. But both of these homegrown assets possess stunning profiles…and both have important messages to share. One says to avoid the dollar; the other says to avoid American financial stocks. We are inclined to listen to them both.

“‘Giselle Bundchen wants to remain the world’s richest model,’ Bloomberg News reports, ‘and is insisting that she be paid in almost any currency but the U.S. dollar…When Bundchen, 27, signed a contract in August to represent Pantene hair products for Cincinnati-based Proctor & Gamble Co., she demanded payment in euros.’

“The Brazilian super-model might not be a super-investor, but several super-investors share her dollar-phobic perspective. Warren Buffett and Bill Gross, for example, both suggest selling dollars. ‘We’ve told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non-dollar currency,’ said Gross, the manager of the world’s biggest bond fund. ‘That should be on top of the list.'”

Eric J. Fry
November 7, 2007

With Short Fuse flying across the country yet again today – and yes, her arms are very tired – we go back to Bill for some more words of wisdom…

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Now comes word that the world’s richest model has reportedly refused a contract to be paid in U.S. dollars. Gisele Bundchen is a Brazilian beauty. She’s also no fool. She’s asking for contracts specifying payment in euros (EUR).

And she’s in good company. Warren Buffett: “We are still negative on the dollar relative to most other currencies, so we bought stocks in companies that earn their money in other currencies.”

Our old friend Jim Rogers, also recently announced that he was selling his home and all his possessions to buy Chinese currency, the yuan (CNY).

“The dollar is in serious, serious trouble,” he said. If the Fed doesn’t raise rates…that is, if there is no Volcker to bite the bullet…”the dollar is going to collapse.”

And now Bill Gross of PIMCO says that if you could only make one investment, you should buy something that is not in dollars.

The poor greenback has lost 34% of its value since ’01, according to Bloomberg. Of course, it depends on how you measure it. It’s lost more than that in terms of oil and gold, for example. Yesterday, oil hit a new record high – at $96.70. The commodities index also hit a new record high. And gold hit its highest point since ’80…at $823.

You go girl!

Credit Suisse predicts that the price will continue to rise – to over $1,000 an ounce in the next five years. We don’t think we’ll have to wait that long. At the rate it’s moving, gold could easily push over $1,000 next year. No sweat.

Over the last 18 years, new supplies of gold have failed to meet new demand in all but two years. The deficit was closed by sales of gold from central bank vaults. You can imagine central banks selling their gold when prices were falling…or, even, as the Bank of England did, at the lowest price for gold in 20 years. But it is hard to imagine that central banks will want to sell much gold when it is in such an obvious bull market. Most likely, sales will decline…and the price of gold will soar.

What gives? Is the dollar doomed?

Yes, dear reader, the dollar is doomed.

Should you do like Jim Rogers and sell your house in order to buy yuan? Or sell all your dollar investments in order to buy the euro…or gold?

Well, maybe…

Our guess is that the dollar has further to go…down. And gold has further to go…up.

“Unless there’s some new Paul Volcker waiting in the wings,” said old friend Marty Weiss over dinner last night, “it’s hard to see what could save the dollar.”

“Is there some new Paul Volcker warming up somewhere?” we asked rhetorically.

“No…”

Volcker saved the U.S. dollar in the early ’80s…by putting up interest rates and tightening credit. He barely got away with it then. Now, it would be impossible. Even with the Fed’s current ‘open bar’ policy, a lot of people are drying out, sobering up, and getting cranky.

“A wave of foreclosures and evictions is about to sweep the United States in the wake of the subprime mortgage lending crisis,” says the BBC.

“This could destabilize the U.S. housing market and may also lead to further turmoil in financial institutions, which collectively own $1 trillion worth of subprime debt.”

The BBC sent one of its reporters to Cleveland – poor guy. It’s the “subprime capital of the United States,” the report continues, with 10% of the houses empty…and whole neighborhoods “blighted by foreclosed, vandalized and boarded-up homes.”

“There have already been 1.7 million foreclosure proceedings in the US in the first eight months of 2007, and up to 2 million families are expected to lose their homes over the next two years, according to estimates by the US Congress’s Joint Economic Committee.

“Many of these mortgages were sold by unscrupulous and little regulated mortgage brokers, who received handsome commissions for selling expensive and unsuitable products.”

No, dear reader, there is no Paul Volcker ready to protect the dollar. And no, there is probably nothing to stop the price of gold from going over $1,000 – except perhaps a depression.

The best advice is probably the same advice we gave at the beginning of the decade: Sell the Dow/buy gold.

Is it too late?

No, we don’t think so.

Two things make us think the gold bull market has much further to go.

First, the public is not really in it yet. They’re hearing about it now. They’ve been asking questions, but they haven’t bought in. Taxi drivers are not yet giving tips on what mining stock to buy. Coin sellers are not yet reporting shortages. The price of gold is not yet front-page news. When these things happen, you’ll know it is time to move on. But we’re not there yet.

Second, the old gold bugs are a fearful bunch. They remember the last time gold rose to $800. It makes them twitch and fret to think about it. They suffered for the following 20 years. They don’t want to live through that again. If they bought at the last peak, after 27 years, they’re finally back to break even. Many will want to get off this train before it goes into the tunnel again. They say bull markets climb a wall of worry. There are still plenty of worrywarts in the gold market…and plenty of places for gold to get a foothold as it climbs up.

Predicting a $1,000 price for gold seems modest…

But when they start calling for $10,000…it will probably be time to reconsider.

Until tomorrow,

Bill Bonner
The Daily Reckoning

Oh, what a wonderful Indian Summer…

We’re not talking about the weather. It’s rainy and cold here in London.

We’re talking about the financial markets.

This past summer the financial markets got hit with the subprime problem. All of a sudden, hedge funds went broke…stock markets wobbled…and people lined up in front of a British bank, desperate to get their money out. They were afraid that the thing would sink and take their money down with it.

Within hours, the financial authorities swung into action. They threw open the doors and said: drinks on the house! The Bank of England effectively guaranteed all bank deposits…and the Bank of the United States of America, the Fed, lowered its key lending rate and also put more new money into the banking system than at any time since 2001.

“Liquidate labor…liquidate the banks…liquidate the stock market…” that was Andrew Mellon’s response to the credit crunch of the early ’30s. He thought a good house cleaning would straighten things out. But 75 years later, the ‘liquidate’ was transformed into ‘liquefy.’ And now, with the central banks’ ‘open bar’ policy, it looked for a while as though the party might keep going for a while longer. Stocks rallied. The problem was “contained,” said U.S. Treasury Secretary Henry Paulson.

And for a while, it did look as though the scorching summer was over.

But then…back it came. In September, Wall Street’s biggest firms began to announce writedowns…a billion here, two billion there…and pretty soon this was beginning to add up to real money.

Today’s news from Bloomberg tells us that the losses at Citigroup (NYSE:C) – America’s largest bank…and the one that most aggressively exploited the credit bubble – might rise to $13.76 billion. Other firms are taking big losses too…

Alas, those smarty-pants financial models they used had some flaws. Goldman Sachs (NYSE:GS) said it got hit by a 25 sigma event – or 25 standard deviations from the norm…or the sort of thing that comes along only once in the life of the universe. That’s what their mathematical models told them.

But what were they thinking? The models were nonsense…elegant, sophisticated confections based on assumptions that just weren’t true. As we explained here in The Daily Reckoning, there is no way to measure genuine ‘risk’ in the real world. You never know what will happen. And when you think you know, you merely set yourself up for a colossal failure. If you think you know that stocks always go up, for example, you buy them at any price – even outrageously high levels. Result: you create the conditions for a crash; you cause the very thing you were trying to protect yourself against.

It was obvious to even a freshman math student that you can’t compute real risk…and that markets have feedback mechanisms than tend to short circuit any kind of broadly followed modeling technique. Still, the deviants at Goldman and elsewhere saw no profit in intellectual honesty. The money was to be made by bedazzling the chumps with fancy formulae and incomprehensible new trading instruments. In place of real risk, they merely inserted volatility…as if the lowest price a derivative contract could sell for tomorrow was no lower than what it brought yesterday, no matter how many new junk derivative contracts entered the marketplace.

Ah, there was another error…assuming that these contracts were independent of each other. The modelers figured that they could calculate the pricing of a CDO tranche as if it stood blissfully apart from the real world of market panics…and investor hysteria. They imagined that their models would function normally…even when investors were abnormally spooked.

Instead, when the trouble began, investors suddenly realized that the pricing models were useless. They wondered what really was in those contracts they owned…and what they were really worth. Buyers went on strike. They would bid only $20 on a lot the seller was offering at $100. Suddenly, buyers and sellers, lenders and borrowers, couldn’t get together. They didn’t know what anything was worth…and didn’t want to find out the hard way. The credit markets had seized up.

As the big firms reported big losses, big heads began to roll. Every day brings word of a new Wall Street honcho who has been given a few million and told to pack up. Warren Spector…Stan O’Neal…Chuck Prince…

Of course, all of this is good, clean fun. It’s actually a pleasure to see that what goes around coming around. It couldn’t have happened to a nicer bunch of guys. Everyone likes to see Wall Street get what it has coming. Trouble is, the trouble doesn’t stop there…